Japan's government plans to guarantee about 700 billion yen ($7.7 billion) in loans and other funds provided by financial institutions to keep Japan Airlines Corp. afloat, the Nikkei business daily reported.

The plan will be funded through an extra budget for the current fiscal year to next March, which is expected to be compiled this week, Nikkei said on Sunday without citing sources.

The plan is aimed at keeping JAL from having to suspend scheduled flights due to a shortage of operating funds, Nikkei said.

Debt-laden JAL has warned it faces bankruptcy unless it undergoes a major restructuring to cut costs, and is seeking a capital injection from a state-backed fund on top of any capital from American Airlines or Delta Air Lines .

Nikkei said the loan-guarantee scheme will cover possible investments from financial institutions in the airline, and the support measure will enable them to provide necessary funding for JAL on short notice.

Standard & Poor's cut JAL's corporate credit rating to a selective default on Wednesday, citing a pact with creditors to freeze some loan payments under a mediated debt restructuring called Alternative Dispute Resolution.

The suspension of those debt payments has been agreed to by JAL's major creditors, giving it some breathing room while the state-backed Enterprise Initiative Turnaround Corp deliberates on whether to inject it with public funds.

The ETIC is expected to make a decision in January.

(Reporting by Tetsushi Kajimoto)

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